Hostess blames unions.

So the media is flogging the sad idea that unions caused another business to fold...

Another load of dingoes kidneys.

As economist Dean Baker of the Center for Economic and Policy Research put it in his CEPR post yesterday (with background information provided by his colleagues Eileen Appelbaum and Mark Weisbrot:

It is not clear that [the workers] had a better route available to them. It is important to understand a bit about the history of Hostess in assessing whether the workers and their union made the right call.

Dean looked first at how Hostess wound up in bankruptcy originally.

Hostess has been relying on pretty much the same mix of products for decades. While other companies have sought to adjust to changing consumer tastes, Hostess still gets the vast majority of its revenue from a relatively small number of products that it has been selling in largely the same form since the sixties. This failure to innovate was the main reason that the company first went into bankruptcy in 2004.

There doesn't seem any question that Hostess needed new leadership. Instead, after five years in  bankruptcy, it got the private equity company Ripplewood Holdings, which took over in February 2009.

Remarkably, [Hostesss] exited bankruptcy with nearly $670 million in debt, almost 50 percent more than the $450 million it owed when it went into bankruptcy. Usually companies use bankruptcy to shed debt. With Hostess the opposite was true.

This meant that Ripplewood was taking a heavily leveraged gamble. If the company survived, it would get a very high return on its investment. However there was a strong likelihood that the company would not be able to make it given its extraordinary debt burden and the weakness of the economy.

Ripplewood first asked workers for concessions in August of 2011. The workers refused since they had made substantial concessions in 2008 to facilitate the exit from bankruptcy. The concessions did not prevent layoffs of close to 20 percent of the workforce. The company also had stopped making payment to the pension fund in July of 2011 and is now more than $160 million in arrears.

Ripplewood took the company back into bankruptcy in January of this year, owing close to $1 billion. It has used bankruptcy to impose new contract terms on workers. This is the immediate cause of the current impasse, with the bakery workers’ union refusing to accept the reductions in pay and benefits and changes in work rules demanded by management.

Workers had several important issues to consider beyond just the prospect of working for less pay and under worse conditions. First, and most importantly, there was little reason to have much confidence in the current management team. They had done nothing to turn the company around in the three years since the last bankruptcy and there was little reason to believe that they would do any better going forward.

Accepting new concessions would provide no guarantee of job security. In fact, management wanted the unions to agree to the closure of 10-12 plants (of its choosing) as part of a new contract. This means that many of the company’s 18,000 workers would soon have been laid off even if the workers had accepted management’s terms.

Second, management was not shy about rewarding itself in spite of the company’s poor financial condition. The CEO upped his annual pay to $2.25 million and other top executives got raises of 35-80 percent. This doesn’t seem like the behavior of management that puts the survival of the company first.

Third, the financial situation of the pension has to be a top concern for workers. While the pension is guaranteed by the Pension Benefit Guarantee Corporation, the guarantee for multi-employer plans like the one at Hostess is limited. If the plan were to become insolvent then many workers would see large cuts in benefits.

From this standpoint, if Hostess were to continue to put off contributions to the pension and allow it to become badly underfunded, then workers could be looking at sharply reduced pensions in retirement. Workers who are approaching retirement age may view this prospect as a far greater danger than the risk of losing their job at this stage in their career.

Whether or not it was good judgment for the workers and their unions to refuse the concessions demanded by management is not clear. At this point, it’s still possible that the company was bluffing and will keep some of its plants open or that another buyer will come in and keep some of the plants operating.

However it is hard to blame workers for not putting their trust in a management team that shows little competence and is rapidly stuffing its pockets at the company’s expense. It is bad news for workers and the economy as a whole when such people gain control of major corporations!